The View from No 50

 

 

 

 

November 2003

K P Bonney & Co 

Chartered Accountants and

Chartered Tax Advisers

50 Cleasby Road  Menston 

Ilkley LS29 6JA

Tel: 01943 870933 

Fax:  01943 870925 

Email: keith@kpbonney.co.uk  

www.kpbonney.co.uk

 

 

 


 

INLAND REVENUE ATTACK

ON HUSBAND AND WIFE

COMPANIES AND PARTNERSHIPS

Back in April, the Inland Revenue stated that it considered it could, in cetain circumstances, use existing tax law to treat the income of one spouse as that of the other.  In brief, it claimed it could do this if one spouse takes a salary which is below a commercial rate, so leaving more profit in the company to be distributed as dividends to shareholders.  The spouse would typically be a shareholder and would receive dividends out of proportion to any financial investment in the company.  The Revenue stated it considered that it could apply the same law to achieve a redistribution of profits between partners in husband and wife partnerships.

 

For a more detailed explanation of the background to this story, please refer to the May 2003 issue of this newsletter.

 

Such was the potential gravity of the Revenue’s pronouncement that the tax and accountancy bodies arranged a meeting with the Revenue to clear the air.  The meeting took place several weeks ago.  Sadly, no agreement has been reached.  The Revenue is sticking to its position.  The profession maintains the Revenue is wrong.

 

The Revenue does state, however, that it only opens a handful of cases each year in which these issues are investigated.  It says it has no plans to increase the number of enquiries it makes in this area.

 

I attend the regular Inland Revenue / Accountants ‘Working Together’ meetings at the tax office in Bradford.  At our last meeting earlier this month I asked the Area Director what instructions had been received from head office about the new approach.  The answer was that no instructions had been received.  For now this is good news.  We can take it that the Revenue at local level will not be interfering with existing profit sharing arrangements.

 

On a broader level, further comfort can be drawn from the assurances given to Parliament by Norman Lamont during the debates on the introduction of independent taxation in the late 1980’s.  The government accepted that the price of independent taxation was that couples would arrange their affairs to minimise the amount of tax they pay.  It recognised the amounts of tax lost would be substantial.  Given this clear and unambiguous acceptance by the then Chancellor, it is quite wrong for the Revenue to set it aside and apply its own interpretation of the law.

 

Our advice:  With luck this episode will prove to have been a storm in a tea cup.  The Revenue’s pronouncements on the law are sometimes what it wants the law to be and not what the law actually is.  Sensible tax planning has been approved by the courts down the years.  The words of Lord Clyde still hold good. 

 

“No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.”   Ayrshire Pullman Motor Services and Ritchie v IRC (1929)

 

 

AND YOU THOUGHT THE

BANKS WERE BAD!

You cannot fail to have noticed that the Bank of England raised its base rate by one quarter of one percent earlier this month.  The banks announced they would increase their lending rates accordingly.  Savers, if they are lucky, might get something less than a quarter of a percentage point extra some time in the future….maybe.

 

The Chancellor has spending commitments to meet and he would rather not be seen to be increasing tax rates if he can help it.  This interest rate increase is a rather good opportunity to raise some more tax without people noticing.

 

With effect from 6 December 2003 the rate of interest on overdue tax is increased by one percent from 5.5% to 6.5%.

 

With effect from 6 December 2003 the rate of interest payable on tax overpaid is increased by 0.75% from 1.75% to 2.5%.

 

And you thought the banks were bad!

 

Our advice: .You may be one of the millions of people who have tax to pay on 31 January 2004.  Don’t be tempted to use the Inland Revenue as a bank.  Make sure you have the money set aside to pay that bill..

 

 

INHERITANCE TAX PLANNING

As this tax starts to impact on more and more estates, lifetime planning takes on greater importance.  The difficulty most planners face is the conflict between wanting to give assets away to save tax on the one hand and needing to hold on to those assets to maintain a certain standard of living on the other.  A further complication is the fact that the donor must survive for seven years after making a gift if the tax planning is to be successful.  In the worst case, a donor could give assets away, suffer a reduced standard of living for six years and then die.  The result is an uncomfortable existence and no tax saving.

 

Many donors are hesitant about making financial decisions the success of which cannot be determined for seven years.  Seven years is a long time.

 

What is to be done?

 

One underused strategy is to invest in business assets of the kind which are eligible for a relief called ‘business property relief’.  For some types of business assets the rate of relief is 50% and for others it is 100%.  If you invest in assets which qualify for the 100% rate, these assets are effectively treated for inheritance tax purposes as having a value of nil.  The assets which qualify for the 100% rate of relief are

 

·          Business interests – the amount invested in a business by a sole trader or partner.

 

·          Shares – the value of shares in an unquoted trading company.  The company can be a family company at one extreme or a company quoted on the Alternative Investment Market (AIM) at the other.

 

The 100% rate of relief is attained once the assets have been owned for a continuous period of two years.

 

Whether you invest in a family business or in a portfolio of unquoted shares the big advantage of this strategy is that you do not have to give anything away.  Hopefully your investment will produce an income which will help you to maintain your standard of living.  Your investment might even grow in value!

 

Our advice:  When carrying out inheritance tax planning, give serious consideration to investing in assets which qualify for business property relief.  We do not ourselves give investment advice but we can direct you towards advisers who do and who can help you to construct a tax efficient portfolio.

 

 

THE GENIE

 

Gary and Phil Neville and Alex Ferguson are sitting down to lunch at Manchester United’s training ground.  Gary notices a small lamp lying on the floor.  Curious, he picks it up and gives it a rub.  Instantly, a genie appears.

 

"You know the deal," says the genie. "Three wishes. But seeing there are three of you, you can have one wish each."

 

"Great," says Gary. "Take me to Hawaii, give me a blonde and an endless supply of lager and leave me there for ever."

 

Pouf! There is a flash of light, a puff of smoke and he is gone.

 

"Now me," says Phil. "Take me to the Fijian Islands, give me two blondes and an endless supply of lager and leave me there for ever."

 

Pouf! There is a flash of light, a puff of smoke and he is gone.

 

The genie turns to Alex. "And what do you want?"

 

"I want those two back on the training ground straight after lunch."

 

 

Copyright  Ó  K P Bonney & Co LLP 2003.  All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers.  Disclaimer  The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors  or the publishers.

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